Property Investment Report
2022
*Source: Vail Williams’ transactional information, PropertyData, CoStar
Summary After nearly two years of global distress and volatile markets, is the UK moving onto a more stable footing? The data is certainly starting to point that way. According to the Office for National Statistics, the UK economy grew by 0.9% in November 2021, exceeding pre-pandemic levels for the first time since the pandemic began. With all sectors growing, the UK economy is indisputably advancing, and it is easy to consider Covid as something of the past. However, it is a brave soul who calls an end to global fluctuation, when we continue to be exposed to emerging Covid variants. Indeed, the Omicron variant slowed economic recovery at the end of 2021 as some public health restrictions were re-introduced and public confidence was knocked once more. So too was investor confidence, as the Government’s move to Plan B in December 2021 caused many to refrain from acquiring less resilient investments - particularly those in the leisure, hospitality, retail and office markets. Despite this, the New Year investment sector has started well, with a flurry of activity and there remains a weight of money in the market, which is encouraging.
This, together with the removal of all Covid restrictions and the cessation of isolation restrictions by the end of February, is likely to spur transactional activity into 2022, particularly in growth areas such as the office market, and the industrial sector, where occupier demand remains strong. We explore some of these investment trends and the dynamics of the investment market in this report, which also discusses what we expect to see happen in the property market over the coming year. We hope that you find this report useful and if you would like to discuss any of the information in it, or a prospective acquisition or disposal, do get in touch. Our team of regional agents based across the country, together with our investment experts, will provide the market insight necessary to inform your investment decisions.
Richard Dawtrey Partner, Head of Investment Vail Williams.
With all sectors growing, the UK economy is indisputably advancing, and it is easy to consider Covid as something of the past.”
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Market snapshot The rollout of the COVID-19 vaccination programme, together with the beginnings of the evolution back to the workplace, resulted in a much stronger performance of the property market in 2021. On the ground, our investment and agency teams saw investors with capital to spend pour back into the market, as pent up demand from 2020 began to filter through.
Interestingly, there were only about 70 more transactions in 2021 compared to 2020 according to our database. However, the average capital value was over £5 million more per transaction, than in the previous year.
This resulted in £15 billion more capital transacted in 2021, compared with the previous year, and we expect this figure to remain relatively stable in 2022, at an expected £60 billion worth of investment tractions.
Despite continued industrial demand, it is interesting to note that investment in the office sector was 3.8% higher by capital traded than industrial in 2021 at £16.4 billion capital traded. This shows what a significant sector the office market represents for 2022, for the astute investor, as we discuss in the next section of this brief report.
Capital invested (£BN) £63.4
Number of investment transactions
£59.4
£59.1
1000
£60.0
3500
900
£51.4
800
3000
700
2500
600
2000
500 400
1500
300
1000
200
500
100
0
0 2017
2018
2019
2020
2021
2022
FORECAST
2017
2018
2019
2020
2021
2022
FORECAST
Office Retail Industrial All Property
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All Property
Sectors
£43.6
Offices In 2021, office investment certainly improved and actually outstripped that of industrial by capital traded. However, this was from a very low base, given that the number of transactions in 2020 was already more than 25% lower than in 2019. When we look at the five-year average, 2021 transaction numbers were down by approximately 20%. This made investors nervous about moving forward with transactions in this market at the end of the year with the emergence of the Omicron variant. However, with £16.4bn of offices transacted in 2021, over £3bn more than in 2020, the signs look positive for the office market in 2022 – particularly in light of the removal of all Covid restrictions and a return to the workplace by many businesses this year. With rental growth and yield compression possible in the future, the prudent investor may look to this market more in 2022.
As occupiers encourage workforces back into the office (again), seeking a flight to office quality and amenity-rich spaces for their staff, we may see investor caution wane as the year progresses. In addition, rising rents and increasing office yields over the last 18 months are starting to make the sector look more attractive to investors. Indeed, those who have faith that the office market will return fully and have the capital to invest in high-quality space, would do well to acquire assets in this market to meet growing occupier demand. Meanwhile, those with existing assets might want to think about investing in or refurbish these, to deliver high-quality space boasting a range of amenities and green credentials.
Office - Total Capital Traded (£BN) £26.3
£27.2 £18.3 £13.7
2017
2018
2019
2020
£16.4
2021
£18.0
2022
FORECAST
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Industrial The industrial boom continued throughout 2021 in a market which has risen like no other over the past five years. Investment in the sector was over £7bn more than the previous year, making 2021 an unprecedented year in capital investment terms for the sector. The investment market is ploughing funds into industrial property like no other, although interestingly, there were fewer transactions in 2020 than 2019. Despite this, the total capital traded was over £1bn more demonstrating the increased demand and value of property in this sector as a whole. It has represented a relative investment safe-haven as demand for high-quality industrial and warehouse space continued to rocket thanks to the logistics, last-mile delivery and e-tailer sectors. With more than 850 transactions spanning a capital value of over £15bn in 2021, we see no reason for the buoyancy of this market to change in 2022.
In all likelihood, it will become stronger, as consumer retail habits continue to drive occupier demand. Indeed, such is the state of demand, that our colleagues are having to undertake best bids on lettings. However, as inflation rises, it will be interesting to see what impact this could have on the industrial market, as the gap between investment yield and risk narrows. Following the recent interest rate rise of 0.25%, we expect this to be swiftly passed on by lenders, adding pressure to investors who have not taken fluctuations into account.
Industrial - Total Capital Traded (£BN)
£15.8 £9.5
2017
£8.3
2018
£7.4
2019
£16.5
£8.6
2020
2021
The total capital traded was over £1bn more despite similar transaction numbers demonstrating the increased demand and value of property in this sector as a whole.”
2022
FORECAST
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Retail The retail market is complicated, with lots of influencing factors affecting its performance. It has benefitted from the strength and resilience of sub-sectors including supermarkets and convenience stores, which together with the resurgence of retail warehousing which increased by nearly 50%, pushed investment volumes to a four-year high. Meanwhile, as expected, High Street retail has remained relatively subdued.
Retail - Total Capital Traded (£BN) £9.0 £6.8
£6.3 £5.0
£7.5
£4.9
In 2021, we saw a number of investors target retail warehousing in the hope of converting the schemes to industrial to capitalise on the low yields affiliated to the sector – a tactic which did reap success. But what of 2022? Could retail prosper this year? It is not impossible, but uncertainty remains. With Q4 2021 the strongest last quarter retail take-up for four years, it is possible that a revival is on the horizon, but this is subject to several caveats. The retail High Street, together with our town centres, need to reposition themselves and drive footfall once more. Without this, the lack of identity that our town centres are currently suffering, will continue. Rents will fall further, and investors will continue to take a sceptical view of this sector as a beneficial investment opportunity. Change needs to happen at speed, and Local Authorities need to force the sector to adapt.
2017
2018
2019
2020
2021
2022
FORECAST
6
Weighted average yields per sector Offices
%
SOUTH-EAST/ M25 BORDER
5.75
REGIONAL
5
SECONDARY
6.5
Industrial
%
DISTRIBUTION (PRIME)
3.5
ESTATE (GREATER LONDON)
2.75 – 3
ESTATE (PRIME)
3.5 – 3.75
SECONDARY (SOUTH-EAST)
4.5
SECONDARY (UK)
5.5
Retail High Street
%
PRIME (EXCLUDING CENTRAL LONDON)
6.5
SECONDARY
8.5
TERTIARY
11.5
Shopping Centres
%
PRIME
8
SECONDARY
11
Retail Warehousing
%
PARK (OPEN A1)
5.5
PARK (BULKY)
5.5
SOLUS (BULKY)
5.25
PARK (SECONDARY)
6
Trend
Growth
Stable Slow
Trend
Trend
Trend
Trend
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Stick to the investment basics In any crisis, people will continue to pursue long term stable income. As businesses return to the workplace, we will see greater demand from office occupiers which will start to return better yields in 2022. Meanwhile industrial assets will remain robust investments, although with a keen eye on the wider economy and yield compression. We expect 2022 to be a much more stable year in investment terms, but with the potential further curve balls like Omicron V2.0, it is wise to stick by your investment basics. Focus on strong locations and do your research into the underlying occupational trends in the market you want to invest in. As always, don’t get drawn into what looks like a ‘too-good-to-be-true’ deal with high yielding investments, because there is likely to be a reason for that or a potential issue lurking in the background.
Risk and return go hand in hand, so consider your personal risk appetite before considering making an offer. Finally, explore opportunities to add value and manipulate the investment to make a better return and, where possible, avoid bidding wars on super prime opportunities which can prove challenging in those sectors like the food and convenience store market, and of course industrial and logistics market, which are experiencing such incredible demand currently. Sticking to some of these investment basics whilst getting expert insight into the markets in which you wish to invest in, will help you to make the most of what 2022 might bring. For support in sourcing the right property investment to meet your needs, contact our property investment experts.
We expect 2022 to be a much more stable year in investment terms, but with the potential further curve balls like Omicron V2.0, it is wise to stick by your investment basics.”
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Key contacts Midlands and North
Richard Goodall Partner Investment T: +44 (0)7971 278385 E: rgoodall@vailwilliams.com
Gatwick
South Coast
Russell Miller Partner Investment T: +44 (0)7760 171443 E: rmiller@vailwilliams.com
Surrey
Steve Berrett Partner Acquisition and disposal T: +44 (0)7780 324996 E: sberrett@vailwilliams.com
Kevin Cook Partner Acquisition and disposal T: +44 (0) 7767 834555 E: kcook@vailwilliams.com
London
Thames Valley
Richard Dawtrey Partner Investment T: +44 (0)7881 588526 E: rdawtrey@vailwilliams.com
Guy Parkes Partner Acquisition and disposal T: +44 (0)7788 188874 E: gparkes@vailwilliams.com
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